JAKKS Pacific (NASDAQ:JAKK) Is Achieving High Returns On Its Capital

By
Simply Wall St
Published
May 25, 2022
NasdaqGS:JAKK
Source: Shutterstock

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at JAKKS Pacific's (NASDAQ:JAKK) look very promising so lets take a look.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on JAKKS Pacific is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.23 = US$41m ÷ (US$316m - US$137m) (Based on the trailing twelve months to March 2022).

Therefore, JAKKS Pacific has an ROCE of 23%. In absolute terms that's a very respectable return and compared to the Leisure industry average of 20% it's pretty much on par.

Check out our latest analysis for JAKKS Pacific

roce
NasdaqGS:JAKK Return on Capital Employed May 25th 2022

In the above chart we have measured JAKKS Pacific's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering JAKKS Pacific here for free.

What The Trend Of ROCE Can Tell Us

JAKKS Pacific has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 362% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 42% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 43% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On JAKKS Pacific's ROCE

From what we've seen above, JAKKS Pacific has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has dived 72% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for JAKKS Pacific (of which 3 can't be ignored!) that you should know about.

JAKKS Pacific is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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